ReThinking A Tech-Powered Supply Chain
Category: Supply Chain • Jun 22, 2020
Guest Article by Oisin Lunny, Journalist, Podcast Host and UX Business Professor
Professor Scott Galloway makes predictions for a living—both as one of the best business school professors in the world and co-host of the hugely influential Pivot podcast with Kara Swisher. When "Prof G" predicts, people listen. One of his recent musings about Amazon, where he is a shareholder, has seismic implications for every other company in logistics.
On his "No Mercy, No Malice" blog, Professor Galloway shared his impressions of the Amazon earnings call at the beginning of May, when the richest man in the world, Amazon CEO Jeff Bezos, started by warning shareholders that they “may want to take a seat” before unveiling what could be his most audacious strategy yet. "Bezos told investors that the $4 billion in profits they were expecting would be reinvested. The investment had a theme: COVID-19. Specifically, Bezos outlined a vision for at-home COVID tests, plasma donors, PPE equipment, distancing, additional compensation, and protocols to adapt to a new world. Jeff Bezos is developing the earth’s first 'vaccinated' supply chain. The genius here is breathtaking."
Amazon, which is used by 82 percent of U.S. households, has a seemingly unassailable position from which to launch the first supply chain of its kind. Their nearest competitor, Walmart, can’t follow suit, as they don’t own their distribution for last-mile e-commerce, while FedEx, UPS, or Prologis are unlikely to make a similar investment this fast. As Professor Aswath Damodaran, a professor of corporate finance and valuation at the Stern School of Business at New York University (aka the "Dean Of Valuation"), observed: Amazon isn’t an e-commerce company or a cloud company, but "a platform that can be used pretty much to disrupt any business” through great execution and unparalleled access to cheap capital.
Philosophy Eats Strategy for Breakfast
Given that Amazon's disruption machine has its gargantuan sights fixed on the supply chain, what can the rest of the industry do to adapt and thrive? The answer, according to MIT Professor of Engineering Systems, David Simchi-Levi, involves technology, philosophy, and the overdue demolition of some outdated assumptions.
"In the past ten to fifteen years there was a lot of focus on strategies like outsourcing, like offshoring, like consolidation. They allowed companies to reduce costs, but this came with a dramatic increase in exposure to risk. There are tradeoffs between efficiency or cost-related strategies and resiliency. When you emphasize low costs, you increase the exposure to risk."
A cost-averse strategy, which by its nature will be more susceptible to risk, is symptomatic of a corporate philosophy that devalues long term thinking. While many companies can handle a degree of disfunction during normal times, the merciless onslaught of the global COVID-19 pandemic has exposed the global supply chain industry to the harshest of lights, and the emperor's senior executives have been found to be severely lacking in suitable attire.
Professor Simchi-Levi started investigating these supply chain blind spots, in collaboration with Ford, after the 2014 tsunami and floods in Thailand. "I realized companies were paying little attention to supply chain risk management. And the reason for that is not only that it's difficult to measure, but it's related. Suppose you oversee cost reduction, and you were able to reduce costs by 10 percent. Everybody celebrates your accomplishment. It's easy to measure. If you are responsible for increasing revenue, and you increase revenue by 7 percent, everybody appreciates that. It's easy to see the impact. But…if you have invested in risk mitigation strategies (and this does not come free, it costs) and nothing happened, how do I know this is because of your risk mitigation strategies? That's part of the problem. Not that companies did not understand that there is a risk, but they were focusing on the next quarter, not on something that happens once every 100 years. And here is the problem. Some of these events happen once every 100 years, but there are so many of these types of events that I don't know what will hit the supply chain in the next 12 months, but I know something will go wrong." Professor Simchi-Levi's predictions from 2014 had a chilling resonance this year when global supply chains fell like dominos following the outbreak of COVID-19.
The disruption machine of Amazon deploys thinking so long-term it could almost be viewed as clairvoyant. So how can other businesses snap out of short-termism? The core of the business philosophy that facilitates a short-term approach is denial. If a company looks only at the unit cost per component, and a component is cheaper to buy in Asia, a cost-saving per unit can be trumpeted in isolation in the quarterly review, with scant regard for associated manufacturing overheads, transportation, etc. Professor Simchi-Levi calls for some radical candor, and for companies to use the total landed cost model when appraising their performance. It might be the most effective antidote to short-term thinking yet.
Time for Transparency
The key to this model is honesty and transparency. Thanks to modern location tracking and other data, the supply chain can be more transparent, granular and flexible than ever before. Tony Matthews is the global head at Cloud Fulfilment, a platform that enables e-commerce companies to have consolidated access to the world’s largest supply chain partners like NetSuite, ShipStation, Linnworks, Shopify, eBay, and indeed Amazon. Matthews is clear that the modern tech-powered supply chain offers some revolutionary new capabilities. “We enable our customers to design and iteratively modify their supply chain via discreet, lightweight APIs. This has huge benefits in terms of flexibility. Our clients can implement features like tracking or inventory management via 5G or RFID, or blockchain for authenticity in the case of luxury products and food safety, and it can all be handled via a portfolio of APIs. The supply chain, and the partners who provide it, can be adapted much more efficiently. You can swap out IT and physical distribution partners as your business needs evolve.”
Matthews advises companies to think twice before committing to work with one of the “highly prescriptive” ERP giants. “Your business will always be on an implementation journey. Your requirements change; there'll be new products, there'll be new markets, there'll be legislation changes. If you are tied into an 18-month implementation journey, your requirements might be different by the time you are half way through, and then you have to go and speak to the guys in their Porsches who turn up and give you the consultancy.”
A Global Solution for A Global Problem
Aliona Yurlova is one of the rising stars of tech-powered supply chain, working as the strategic account manager at global trade enablers DP World, who employ over 50,000 people working at 150 operations around the world. Yurlova previously worked with digital freight services platform providers iContainers, and was based for several years in China. Yurlova sees 2020 as a pivotal year for the global supply chain industry. In a conversation with Yurlova, she shared “We have long exhausted our conventional approach to logistic shortcuts. Resources and labor gaps have been forced to even up, but there was no room for any margin cuts on fuel and transportation, while social media revealed unethical practices that previously hid under regional bureaucracies. The initial digital steps into supply chains proved to be only a bridging solution. Today, it’s no longer just about process automation, not just transparency on operations, neither is it just data management.”
Like Professor Simchi-Levi, Yurlova believes that COVID-19 has shone a spotlight on the deep inefficiency and fragility of global supply chains. She explains why this offers an imperative to move into the future, “Today, digitizing means using technology to reinvent our strategies for the whole of supply chain and its correlated industries: not doing the same better but doing it differently altogether and finding new value. We have found that the effective use of technology revealed alternative logistics hubs, resulted in higher agility on processes and powered up to 60% more forecast accuracy. These kinds of differentials can be game changing for conventional, unexpected or even unprecedented risk management.”
From Competition to Co-opetition
Yurlova can see the emergence of another novel trend in supply chain, driven by some age old problems. “Empty truck runs, vessel blank sailings, empty container repositioning and warehousing misuse have a huge cost. For example, an estimated $2.5 billion is lost yearly to revenue leakage in trucking sector inefficiencies. But companies that have been same-sector rivals in the past can now cross-use or overlap their supply chain networks to minimize costs and risks while keeping their competition ethical, operations management intact and commercial data protected. Toyota and BMW, Apple and Samsung, INDITEX and UNIQLO, Nike and Adidas - can now ride onto each other’s logistics solutions, optimizing their costs and distribution in a secure and fully controlled way. Something that was unimaginable 10 years ago. Amazon, as a Logistics and Distribution enabler - is one of the best live examples of such win-win approach to Supply Chains.”
Yurlova also reveals her work at DP World includes some groundbreaking projects which leverage new technology to improve global supply chain efficiency. DP World recently joined the blockchain platform of Maersk and IBM, and also launched their own worldwide digital platforms.
Get Stressed for Success
Professor Simchi-Levi’s research in the area of supply chain risk management is focused on developing models that allow companies to stress-test the resiliency of their supply chain. The professor explains how it works, "In order to measure the level of resiliency, you need to take your supply chain through stress testing. What it means is building a simulation model, a digital twin of your supply chain, and identifying how resilient the supply chain is. Specifically, the model measures the impact of a disruption anywhere in the supply chain on revenue, profit, market share or lost production. The key here is not only that you need a resiliency test, but that, in certain industries, this is a matter of national security. This is where you have to make sure that, in case of a crisis, you're able to have the right supply to meet the future demand. As we saw in the case of PPEs, as we saw in the case of ventilators, in the last three months."
This modeling approach, which is industry agnostic, has revealed some surprising Achilles heels along the way. "The analytics and the data suggested that strategic suppliers typically were not the most risky suppliers. The risky suppliers were typically small suppliers that provide low-cost components. But if supply is disrupted, you have to stop the entire production line. So that was one motivation as to why a company needs data and analytics to identify where is the risk in your business."
Short-term Management Thinking
Where some commentators have advocated bringing all manufacturing and supply chains back within U.S. borders, Professor Simchi-Levi explains that isolationism as a defense mechanism does not have legs. Why? For quite a few reasons, the first being an epidemic of short-term management thinking. The example he uses is the U.S. supply chain for meat products. "There was a lot of manufacturing consolidation to increase efficiency and cut costs, reducing and consolidating the number of manufacturing facilities to a small number. If one of them is disrupted, supply is not going to be sufficient. And most companies will focus on consolidation, just looking at the impact on cost, and not the impact on risk, especially risk associated with what I call 'the unknown unknowns,' the type of disruption that you cannot predict."
Another factor, which is particularly pertinent when it comes to medical supplies, is that much of the manufacturing processes in place are environmentally unsound. He explains that certain medicines are manufactured in China and India because other countries want to avoid the environmental impact. Although he predicts that China will evolve to cleaner, more environmentally friendly methods of medical manufacturing, a similar level of investment is not going to happen in, for example, the United States.
Moving the Needle
At the heart of Professor Simchi-Levi's framework is a knowledge that data and analytics can improve a supply chain's performance, and resilience, without raising costs. Technology such as blockchain, IoT, and 5G can be leveraged to provide pinpoint accuracy, clear inventory management, and end-to-end transparency. A tech-powered approach to the supply chain opens the door for sophisticated stress testing, and making sure the "unknown unknowns" can be factored in as much as possible. "What we do with data and analytics is to push the tradeoff scale in the direction of improvement,” said Professor Simchi-Levi. “Because if you can do that, then for the same resiliency, I can cut costs by moving from A to B, or for this same cost, you can see, I can increase resiliency by moving from A to C. And there are a lot of strategies between B and C where I can do better than A."
Professor Simchi-Levi wrote an article in HBR (Harvard Business Review) in February predicting that supply chains will shut down in March. The article was read by 180,000 people in a matter of days and, as history will testify, his predictions were correct. "It's not rocket science, it's just following what companies are doing, it's easy to understand," he reflects modestly. Given the accuracy of his analysis to date, the U.S. supply chain industry would be wise to pay heed to his advice.
Some of the strategic technical methods to help you rethink your supply chain include: leveraging data and analytics via a “digital twin,” taking your supply chain for regular stress tests, and adopting a flexible API-driven mix of onshore and offshore supply chain for global resilience. But success in navigating the new normal would appear to be cultural at its heart. A vaccine against short-term thinking could be the most valuable asset for your business on a post-pandemic planet.
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